Life insurers already offer products that mitigate retirement-income risks, and industry leaders say many more are on the way. Product quality and variety won't matter, however, unless the people who actually meet consumers--the distributors--become excited about the new strategies and products.

Distribution has forever been the major challenge, but now that the industry is banking its future on creating and protecting the retirement incomes of baby boomers, its need to train and motivate distribution partners has never been more urgent. And the challenge may have never been greater because the spending down of assets by such a large segment of America requires a whole new planning strategy.

Among financial-services companies, insurers seem best equipped to be the leaders in this new age. But are distributors and consumers ready?

Overcoming Aversion

"What I'm hearing a lot of, and I have a bit of cynicism, frankly, is a feeling that all we have to do is educate, and all will be well," said Robert M. Baranoff, senior vice president at Limra International. "The feeling is, 'build it and they will come.'"

Baranoff, however, said he doesn't believe that will happen, primarily because retirement-income planning takes real work that consumers will try to avoid and distributors may not be motivated to pursue.

On the positive side, Limra's research shows that, at least on a cognitive basis, consumers want and need advice. "At least on the surface, there appears to be quite an opportunity," Baranoff said. Also, the concepts of new kinds of products resonate with consumers when distributors explain that they protect against investment risk and outliving one's money, so long as the distributors avoid using the words "annuity" or "annuitization."

Baranoff's "cognitive" proviso stems from a November 2005 Limra report. It provided evidence that, contrary to traditional neoclassic economic theory, consumers will not always act in their best self-interest. "Everybody's not quite as rational as we think" said James O. Mitchel, vice president, head of Limra's markets research, and an author of the report. "You've got value as a producer because people do dumb things. This report explains how people make decisions."

A producer might use this knowledge, for example, to persuade a client on the value of what the industry now calls longevity insurance but is really a deferred immediate annuity. People by nature are not inclined to take a sure but small loss, as they would in buying longevity insurance, to protect against the possibility of a large loss, such as running out of money, he said. "We know that people pay much more attention to losses than gains, and they would have to give up this money [at the time of purchase] in order to gain this income stream sometime in the future."

Demonstrating Value

To counter this human inclination, producers would have to become adept at explaining the value of the future gain, he said. "This may be counterintuitive for a lot of advisers in wealth management," he said.

Mitchel said the producers with a better chance of understanding and selling these retirement-income products are probably the ones that don't have as much experience on the accumulation side as the wealth managers. "It's a total flip of their mindset," he said. "They're used to making something bigger, not smaller."

The alternative to purchasing longevity insurance, fixed income annuities, variable income annuities or one of the living benefits offered in deferred variable annuities, is investing in a conservative mix of stocks, bonds and cash and withdrawing from them at a low annual rate, such as 4% or 5%. To implement such a strategy, investment managers calculate the portfolio's internal rate of return. In many cases, insurance-oriented products don't compare well, said Chris Raham, a senior adviser in the Insurance and Actuarial Advisory Practice of Ernst & Young LLP. "For retirement, part of the chip that insurers must bring to the table to motivate distribution partners is what we call 'value demonstration' rather than 'product illustration,'" he said.

Value demonstration is putting the product or the guarantee into the context of a person's retirement plan, Raham said. A product illustration, conversely, simply shows prospects what they might receive in the future from a single product for their paid premiums. This leaves it up to prospects to determine whether the product could make sense for them as part of their overall financial plan, which can be daunting for most consumers. "Because of the nature of the retirement-distribution question, you can't do stuff in silos anymore," he said. "You can't do a product illustration over here and another over here."

A value demonstration would take into account the basics of a client's current financial situation, what he or she wants or needs, and a realistic reflection of all risks, including inflation, investment risk, longevity, and the potential expenses of health care and long-term care. Most platforms today factor in inflation and investment risk, and they calculate the odds of not running out of money at life expectancy or at another chosen age, Raham said. And that is where insurers can substitute guarantees of protection for calculated probabilities of success.

Few distributors are doing this, Raham said. A broker-dealer, for example, might believe an insurer should provide this kind of demonstration capability because the broker-dealer is helping to move the insurance product, while insurers have mixed opinions, he said. "It seems clear to us that when talking about complex guarantees, complex risks and multiple needs, there has to be a way to show the end consumer the value of what they're purchasing," Raham said.

The accumulation phase is easier because people can make investment decisions based on anticipated rates of return, said Raham. Insurers training and motivating distributors to sell retirement-income products need to help them understand the value proposition of the product, how to position it, and which products are suitable for individual financial situations.

In many cases, distributors tend to sell what they know, Raham said. "If their thing is equity-indexed annuities, they're going to sell you an EIA," he said. "If you see a variable-annuity specialist, you'll see a variable annuity come out in the end. But in retirement, there are multiple products and multiple risks, and people need to understand there's more than one option available to them."

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Key Points

* Selling retirement-income products will require new learning and strategy by insurers and producers.

* Retirement-income products may not illustrate well by themselves. Financial advisers must be able to demonstrate their value.

* Behavioral economics shows that clients cannot be expected to act in their best interests without serious guidance.

Getting Distributors, Consumers to Listen

Life insurers face an uphill battle to convince producers and consumers of the virtues of their new products.

Limra International's senior vice president, Robert M. Baranoff, said the barriers include the following:

* People prefer to spend their spare time doing other Robert M. Baranoff things. "People are time-starved, and this is not the most fun way to spend the little time they've got," he said.

* The median age of independent distributors is 56; slightly less for career agents. "Half of them are approaching retirement themselves. If they've made it this far in their careers, they're probably set in their ways and are not really interested in changing a lot by learning new things."

* Younger distributors tell Limra that companies are really good at product training, but that's not necessarily going to be the skill set needed to sell the new products. "Young folks are going to try to sell these to older folks, so there's an inherent mismatch, a distrust. So what they're going to need to be taught is how to approach and sell to older folks. And that's not really high on the radar screen of training programs, frankly."

* Producers selling deferred annuities and other accumulation products can "roll the business" every so often. "So if you place people into a product that's for life, and you're tying up those assets, what's in it for the producer down the road?" asked Baranoff.

Behavioral Economics: Why People Prefer to Take a Chance

In a study about behavioral economics, authors James O. Mitchel of Limra and Professor R. James Holzworth of the University of Connecticut found:

* Rather than incur the certain loss of paying an insurance premium, many people prefer to chance a low-probability loss.

* People tend to insure against high-frequency losses of low financial impact. They often fail to insure against low-frequency, high-impact events.

* People have limited time, so they cannot be expected to solve difficult and complex problems optimally. Instead, they proscrastinate or use rules of thumb because the up-front cost of working through a decision is great.

* People may copy the decision of a friend or relative and buy the same kind of insurance in order to reduce the search cost.

* Three emotions important in decision-making are regret, fear and love.

* People don't like the idea of paying a premium for pure protection. They like to think of insurance as an "investment" that will pay them back.

Source: Limra International, October 2005

You Can't Just Go In and Sell Longevity Insurance ...

You must be prepared to explain why it can help. Asking a client to plunk down $60,000 or so now to buy something that sits for two decades without paying back a cent is not likely to go over very well. Agents must demonstrate how longevity insurance can increase the chance for better returns on remaining assets, the chance of not running out of money and the chance of having greater assets before longevity insurance payments begin.